A battle is being fought over an amendment in the financial reform bill that would change the way the Federal Reserve charges banks for check processing.
Opponents of the measure, including community bank trade groups and Fed Chairman Alan Greenspan, argue that it would lead to higher fees for banks that clear or transport checks through the Fed.
"This plays around with Fed pricing and will have the effect of raising costs for every check the Fed touches," said Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America.
But the amendment's supporters, including several lawmakers and a lobbying group called the Association of Bank Couriers, reply that the legislation would encourage competition in the check processing business. They say the Fed is unfairly using a surplus from its swelling pension fundto undercut competitors.
"We have been convinced for some time that the Fed competes unfairly with private-sector providers," said Stephen Brown, a lawyer for the couriers association.
The amendment, sponsored by Sen. Harry Reid, D-Nev., would require independent annual audits to ensure that the Fed is charging enough for check services to cover its costs.
The Fed is the check processor of choice for thousands of community banks. Last year, it handled nearly 16.6 billion checks, generating revenue of almost $637 million.
Under the Monetary Control Act of 1980, the Fed is required to set its processing fees at levels consistent with those of competitors.
The amendment, tucked into the Senate version of the historic financial modernization bill, would require the Fed to cover its costs each year with revenue generated that year. (It currently can spread costs over several years.) The bill would also force the Fed to "unbundle" its prices so that competitors can better understand what the Fed charges for individual services.
The House version of financial reform would require the General Accounting Office to study the Fed's role as both regulator and provider of payment services.
Community banks have a powerful ally in Mr. Greenspan. In a letter last month to House Banking Committee Chairman Jim Leach, R-Iowa, the Fed chief called the provisions "ill-advised."
"These requirements would increase the cost and reduce the attractiveness of the Reserve Bank financial services to the thousands of depository institutions and their customers," he wrote.
Mr. Brown of the Vorys, Sater, Seymour & Pease law firm disagreed. "They have never produced on iota of evidence that prices would, in fact, increase," he said.
Community bankers are keeping a close eye on the battle.
David E. Hayes, president of $131 million-asset Security Bank in Dyersburg, Tenn., said that though he sees little difference in rates charged by the Fed or his correspondent bank he believes the Fed's sheer presence as a check processor helps keep prices competitive.
"If we didn't have the Federal Reserve," he said, "we'd have a situation whereby (private-sector companies) would charge whatever they can get."
